THREE FIVE SYSTEMS, INC.

                              DIRECTORS' STOCK PLAN



SECTION 1.  Purpose

The purpose of the Three Five Systems,  Inc.  Directors' Stock Plan (the "Plan")
is to further strengthen the alignment of interests between members of the Board
of Directors (the "Board") of Three Five Systems,  Inc. (the  "Company") and the
Company's  stockholders  through the increased ownership by non-employee members
of the Board  ("Participants")  of shares of the Company's common stock ("Common
Stock").  This will be  accomplished  by  requiring  Participants  to  receive a
portion of their fees for services as a Director in shares of Common Stock.

SECTION 2.  Administration

The Plan shall be  administered  by the Board.  Subject to the provisions of the
Plan, the Board shall have sole and complete authority to construe and interpret
the Plan;  to establish,  amend and rescind  appropriate  rules and  regulations
relating to the Plan;  to  administer  the Plan;  and to take all such steps and
make  all  such  determinations  in  connection  with  the  Plan as it may  deem
necessary or advisable to carry out the  provisions  and intent of the Plan. All
determinations  of the Board  shall be by a  majority  of its  members,  and its
determinations  shall be final  and  conclusive  for all  purposes  and upon all
persons,  including,  but without limitation,  the Company, the Participants and
their respective successors in interest.

SECTION 3.  Eligibility and Participation

Participation  in the  Plan  shall  be  limited  to  Participants.  On the  date
specified in Section 5, each  Participant  shall receive  shares of Common Stock
equal in value (the "Specified Stock Value") to two-thirds of that Participant's
annual  retainer fees. The Common Stock received  pursuant to this Plan shall be
received in lieu of the equivalent value of annual retainer fees paid in cash.

SECTION 4.  Common Stock Subject to the Plan

The total number of shares of Common Stock initially  reserved and available for
distribution  under the Plan shall be 20,000,  subject to  adjustment  as herein
provided ("Total  Available  Shares").  If the number of treasury shares is less
than the Total Available Shares,  the Total Available Shares shall be reduced to
the number of treasury shares.  All shares  distributed under the Plan (a) shall
reduce the Total Available Shares and (b) must be shares  previously held by the
Company  as  treasury  shares.  
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In the event of any  merger,  reorganization,  consolidation,  recapitalization,
Common Stock dividend, Common Stock split or other change in corporate structure
affecting the Common Stock, the Board, in its sole  discretion,  shall make such
modifications,  substitutions  or adjustments  as it deems  necessary to reflect
such change so as to prevent the dilution or enlargement  of rights,  including,
but not limited to, modifications, substitutions or adjustments in the aggregate
number of shares reserved for issuance under the Plan.

SECTION 5. Issuance of Shares

Shares of Common  Stock shall be issued  annually  under the Plan on the date of
the annual meeting of the  shareholders of the Company.  The number of shares of
Common  Stock to be received by a  Participant  under the Plan shall be equal to
the  Specified  Stock Value  divided by the closing price of the Common Stock as
reported in the Wall Street  Journal (or in such other source as the Board deems
reliable)  for the last market  trading  day prior to the annual  meeting of the
Shareholders of the Company.

All shares issued under the Plan,  including fractional shares, shall be held in
a  book-entry  account  with the  Company's  transfer  agent  unless  the  Board
designates  another  person  to act in that  capacity.  Participants  may in the
alternative  elect to  receive a stock  certificate  representing  the number of
whole shares  acquired by notifying  the  Corporate  Secretary of the Company in
writing.  The  Company  will make a cash  payment  to the  Participants  for any
fractional share in lieu of issuing a stock certificate.

Common Stock acquired under this Plan shall be subject to such other  conditions
and restrictions, if any, as the Board may determine.

SECTION 6.  Additional Provisions

The Board  may,  at any  time,  amend,  alter or  discontinue  the Plan,  but no
amendment,  alteration  or  discontinuance  shall be made which would impair the
rights of a  Participant  with  respect  to shares of Common  Stock  previously,
distributed to such Participant under the Plan, without the Participant consent,
or which, would cause the Plan not to comply with Rule 16b-3.

With  respect to persons  subject to Section 16 of the Act,  transactions  under
this Plan are intended to comply with all  applicable  conditions  of Rule 16b-3
regardless of whether such  conditions  are set forth in the Plan. To the extent
any provision of the Plan or action by the Board fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by the
Board.

Every  recipient of shares pursuant to this Plan shall be bound by the terms and
provisions of this Plan, and the  acceptance of any transfer of shares  pursuant
to this Plan shall constitute a binding  agreement between the recipient and the
Company. 
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SECTION 7. Duration of the Plan

The Plan was  approved  unanimously  by the Board on January  29, 1998 and shall
become effective immediately.


                                        THREE-FIVE SYSTEMS, INC.


                                        
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                                        Jeffrey D. Buchanan
                                        Secretary

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